This blog, written by Thomas E. Rutledge, focuses primarily on business entity law in Kentucky. Postings on contract law, contractual and statutory construction, and the entity law of other jurisdictions appear as well. There may as well be some random discussions of classical, medieval and renaissance history.

Friday, October 16, 2015

Okay, Then Who Are the Members?

Okay, Then Who Are
the Members?

For purposes of federal
diversity jurisdiction, 28 USC § 1332, a limited liability company is deemed to
be a citizen of each jurisdiction in which one of its members is a citizen. As
such, in either asserting or challenging the existence of diversity
jurisdiction, it is crucial to be able to identify who are the members of a
particular LLC. In a recent decision, the court determined that, on the
available evidence, it could not conclusively determine who was or was not a
member of a particular LLC. Black Water
Management LLC v. Sprenkle, Civ. Act. No. 3:15-CV-365, 2015 WL 5089367 (E.D.
Va. Aug. 27, 2015).

Schur and Sprenkle were to
establish and be the members of Black Water Management LLC, it to be devoted to
the management of certain musical talent. Schur was to invest cash while Sprenkle
was to contribute his interest in certain existing talent management contracts.
Schur contributed the capital commitment and more. Sprenkle, however, did not
contribute the management contracts in that, notwithstanding his assertions,
they did not in fact exist. Schur filed suit against Sprenkle and a number of
others in federal court on the basis of diversity jurisdiction. One of those
defendants, Vorlop, filed a 12(b)(1) motion seeking dismissal on the action on
the basis that diversity jurisdiction did not exist. Specifically, as (i) Vorlop
was a citizen of Virginia, (ii) Sprenkle was a Virginia citizen, and (iii) Sprenkle’s
citizenship would be attributed to Black Water, then both Vorlop and Black
Water were Virginia citizens and there is not diversity of citizenship. Schur
alleged that Sprinkle is actually not a member of the LLC, and that diversity
was retained.

Schur’s argument was that as Sprenkle
had never made his agreed capital contribution to the company, he was not a
member thereof. In response to this position, the court engaged in an analysis
of the language employed in the operating agreement, finding that member status
and satisfaction of the capital contribution obligation were not coextensive.
Rather, while that was an obligation to make certain contributions, the
language of the operating agreement did not define satisfaction of that
contribution obligation as a condition precedent to becoming a member. Rather,
one was a member with a capital contribution obligation. Citing both another
Virginia case, Chaudhary v. Broad, 60
Va. Cir. 128, 2002 WL 183-1990, at *2 (Va. Cir. Ct. July 25, 2002) and Ribstein & Keatingeon Limited Liability Companies § 507, the
court noted that it is entirely possible to, in the operating agreement,
condition member status upon satisfaction of the capital contribution
obligation, but then the failure thereof one may still be a member. The court
found that it could not be determined at this juncture that Sprenkle as was not
a member.

With respect to extrinsic
evidence, namely tax returns, it was found that they did not address whether Sprenkle
was a member of the company at the time the complaint was filed.

Ultimately, Vorlop’s 12(b)(1)
motion to dismiss was at this juncture denied on the basis that Vorlop had not
carried his burden of proof that Sprenkle was a member of Black Water Management.

This case highlights the
importance of defining in the operating agreement what are the conditions
precedent to becoming a member versus what are the obligations imposed upon
persons who are already members.